With China and Japan at odds over disputed islands to the east, the potential for conflict in the south may seem muted for now. But not for long.

As Defense Secretary Leon Panetta’s visit to Japan, China, and New Zealand shows, President Barack Obama’s "pivot to Asia" continues apace. But if U.S. policy toward this strategically important region is to be successful, it must take into account a paradox: China’s neighbors seek greater U.S. economic, diplomatic and military involvement in the region as a counterbalance to China’s growing power — but at the same time, every country in the region also desires a close relationship with Beijing.

The difficulty of navigating this paradox is clearly evident in the handling of territorial disputes in the South China Sea. Southeast Asian nations periodically urge Washington to help them stand up to Chinese pressure to accept Beijing’s expansive claims there — but when Washington acts to prevent China from running roughshod over the region, its partners’ concerns about U.S.-China tensions spike and they implore the United States to step back. It is this paradox that makes maintaining a consistent and principled U.S. policy on the South China Sea both challenging and essential.

The United States has a great deal at stake in the South China Sea. It is one of the world’s primary trade arteries, with over half of the world’s merchant fleet by tonnage sailing through those sea-lanes each year. The region also contains an abundance of fish — an important source of revenue for the bordering countries’ economies — and potentially contains significant quantities of oil and gas resources strategically located near large energy-consuming countries.

Yet the South China Sea is a tangle of competing territorial demands. China, Taiwan, Indonesia, the Philippines, Vietnam, Malaysia, and Brunei all assert overlapping claims over land features and adjacent waters in the sea, heightening diplomatic tensions and potentially laying the foundation for a future military conflict. And while no country is blameless in this standoff, China is clearly the most egregious aggressor. It is currently following a deliberate policy of bullying and intimidating its smaller neighbors into recognizing its sovereignty over large swathes of the sea — and the United States must clearly communicate that such behavior is unacceptable.

The South China Sea has long been a military flashpoint. Skirmishes took place periodically on its waters from the mid-1970s to the mid-1990s. A decade of relative quiescence followed, but tensions have flared since 2007, with a marked increase in incidents and provocations. The main causes of growing tensions are rising interest in surveying and exploiting the South China Sea’s oil and gas deposits, intensified competition for fish as stocks in close proximity to coastlines are depleted, and growing nationalistic pressures on governments to defend their territorial and maritime claims.

The most serious confrontation in decades took place this past spring over a triangular-shaped chain of reefs and rocks called Scarborough Shoal, located approximately 124 nautical miles from Zambales, the Philippines. In early April, a Philippines frigate, which had been deployed to observe a pending North Korean missile launch, was redirected to Scarborough Shoal to investigate the presence of eight Chinese fishing boats in the lagoon. Infuriated by what it viewed as a provocative and escalatory action, China dispatched two large maritime surveillance ships to the shoal, which positioned themselves between the Chinese fishing vessels and the Philippine warship. Over the ensuing weeks, Manila withdrew the frigate and replaced it with a coast guard cutter, while the Chinese increased their presence, at one point deploying approximately eighty surveillance ships, fishing boats, and utility craft in the lagoon. Manila’s staunch refusal to withdraw was met with additional Chinese intimidation: Beijing began to quarantine tropical fruit imports from the Philippines and apply other forms of economic pressure. Quiet diplomacy produced a verbal agreement in early June that both sides would pull out their ships and end the standoff, but only Manila complied. After the Philippines withdrew, China roped off the mouth of the lagoon to prevent Filipino and other fishermen from entering, and stepped up patrols around the shoal.

It’s clear that there is a cycle of escalation underway in the South China Sea that threatens to destabilize this critical region. However, it is important to note that China’s claims, policies, ambitions, behavior, and capabilities are significantly different from those of other actors. Beijing resists engaging in multilateral discussions on the territorial and maritime disputes in the region, preferring bilateral mechanisms where it can apply leverage over smaller, weaker parties. It rejects a role for the International Court of Justice (ICJ) or the International Tribunal on the Law of the Sea (ITLOS) in resolving the territorial and maritime disputes in the South China Sea.

Although Beijing has agreed to eventually enter into negotiations to reach a code of conduct for the South China Sea, Chinese officials have recently stated that discussions can only take place "when conditions are ripe" — which, evidently, is not now. The United States views a code of conduct as a tool for conflict prevention and conflict resolution, and urges negotiations to begin immediately. Chinese officials, meanwhile, prefer the 2002 Declaration on the Conduct of Parties in the South China Sea, which has no dispute resolution mechanism and is not legally binding.

China’s behavior in the South China Sea is deliberate and systematic — it is not the unintentional result of bureaucratic politics and poor coordination. In fact, its aggressive actions in recent months suggest, in the words of Center for a New American Security fellow Oriana Skylar Mastro, "exemplary interagency coordination, civil-military control, and harmonization of its political, economic and military objectives." The clear pattern of bullying and intimidation is evidence of a top leadership decision to escalate China’s coercive diplomacy. This has implications not only for the Philippines and Vietnam, the primary targets of China’s coercive efforts, but also for all parties with an interest in the region, including the United States.

First, China’s propensity to flout international law and norms sets a worrisome standard going forward. Beijing deliberately refused to abide by its verbal agreement with Manila to withdraw all its ships from the lagoon and the area around Scarborough Shoal, establishing a new status quo that favors Chinese interests. China is maintaining regular patrols and preventing Filipino fisherman from fishing in those waters. No country — including the United States— has publicly condemned this action. This has set a dangerous precedent for future negotiations.

Second, China appears increasingly willing to throw around its economic weight to coerce countries to modify their policies. Beijing’s move to quarantine imported tropical fruit from the Philippines to pressure it to cede control over the Scarborough Shoal was a flagrant breach of international norms. To cover up this latest bit of economic coercion, Chinese customs officials cited baseless claims that the fruit was infested. The Philippines economy suffered immediate harm since the country exports nearly one-third of its banana crop to China, as well as papayas, pineapples, mangoes, and coconuts. In addition, Chinese travel agencies cancelled tourist charter flights to the Philippines on the grounds that the safety of Chinese tourists was endangered by "anti-China demonstrations."

This episode is but one example of China’s growing penchant for economic coercion. In September 2010, Beijing blocked shipments of rare earth minerals to Japan in retaliation for Tokyo’s detention of the captain of a Chinese fishing trawler in an incident near the Senkaku Islands. Later that year, following the announcement that the Nobel Peace Prize would be awarded to Chinese dissident Liu Xiaobo, China took a series of steps to punish Norway — even though the decision to whom to award the prize is made by the Nobel Committee, which is independent from the Norwegian government. China froze free-trade negotiations with Oslo and imposed new veterinary inspections on imports of Norwegian salmon. These regulations resulted in a 60 percent cut in Norway’s salmon imports in 2011, even as the Chinese salmon market grew by 30 percent. Beijing also halted normal diplomatic interaction with Norway, which it has yet to resume.

Beijing views these cases as diplomatic successes. If China’s economic coercion continues to go unchallenged, such tactics will undoubtedly be used again and again. China is thus likely to have sway over a growing number of nations whose economies are increasingly dependent on trade with China.

Third, China’s rejection of a rules-based framework that would restrain the actions of all parties should be a cause for concern. Beijing calculates that time is on its side — why should it sign binding agreements now, when its leverage is only poised to grow? In the future, China will not only be a major economic power, but also a major political and military power. Other nations, large and small, will be compelled to adapt to China’s rise and to respect, in the jargon of Beijing’s diplomats, China’s "core interests and major concerns." Given Beijing’s unwillingness to adhere to a code of conduct and its complete lack of interest in accommodating the interests of other nations, the use of military force by claimants to protect their interests cannot be ruled out.

China’s pattern of assertive behavior on issues related to sovereignty will likely continue after the country’s leadership transition takes place at the 18th Party Congress this autumn, and the National People’s Congress next spring. These transitions of power in China only happen once every decade, and the coming one is particularly important – the next generation of leaders in Beijing will oversee a period where China’s power is likely to expand significantly, and will determine whether that rise is peaceful.

Because the party bases its legitimacy in large part on its nationalist credentials, no Chinese leader is likely to do anything but aggressively defend Chinese sovereignty and territorial integrity. Popular sentiment in favor of a tougher Chinese stance toward the South China Sea has already been stoked. The incoming leadership will undoubtedly be aware of the risks of further stoking these sentiments — but the temptation will be irresistible, as such steps would bolster the new leadership’s legitimacy.

Xi Jinping, President Hu Jintao’s likely successor, is widely believed to have a high degree of self-confidence — certainly far more than Hu had 10 years ago when he assumed power. Whereas Hu focuses on China’s weaknesses, Xi is from a new generation that grew up in the era of reform and opening up to the outside world, and believes that China is rising quickly. Confident in the belief that the gap between United States and Chinese power is narrowing, Xi is likely to stand up for Chinese interests in the international arena, especially those deemed to be China’s "core interests," which include issues related to sovereignty over the South China Sea.

To some extent, scholarly debate in China has been artificially repressed in the run-up to the leadership transition. Open disagreements, especially on sensitive issues, are viewed as a possible sign of cracks in party unity and are therefore strongly discouraged on the eve of party congresses. These debates, however, will likely burst into the opening in the next year: Questions of whether the United States is in decline and the global balance of power is shifting inexorably in China’s favor, and whether China’s 20-year period of strategic opportunity that began in the turn of the century is prematurely coming to an end. These debates will put additional pressure on the Chinese leadership to assertively defend Chinese interests.

According to informed Chinese analysts, Beijing has drawn the conclusion that former Communist Party chief Deng Xiaoping’s policy toward managing the South China Sea disputes has failed. That policy stated that while sovereignty over much of the sea belongs to China, those disputes can be set aside and joint development can be pursued. The Chinese maintain that while China has refrained from extracting oil and gas in disputed waters, other countries have not been similarly restrained. A new policy has yet to emerge and will likely be postponed until after the leadership transition — but it is almost certain that the new policy will be tougher.

The Obama administration has rightfully enunciated a set of principles to guide behavior in the South China Sea. In July 2010, Secretary of State Hillary Clinton called for "a collaborative diplomatic process by all claimants for resolving the various territorial disputes without coercion." She stated that the United States opposes the use or threat of force by any claimant and insists on unimpeded commerce, freedom of navigation, and open access to Asia’s maritime commons. Clinton further maintained that claimants should pursue their territorial claims in accordance with the U.N. Convention on the Law of the Sea, and urged all parties to reach agreement on a code of conduct in the sea.

It is important that the United States adhere to these principles and censure any party that acts contrary to them. Being objective and fair will give credibility to U.S. policy. An exemplary even-handed statement was made by Panetta in June, when he noted that the United States had "made our views known and very clear to our close treaty ally, the Philippines, and we have made those views clear to China and to other countries in the region."

There is no doubt that China’s behavior has been the most egregious of all the actors in the South China Sea, but to single it out for reproach without mentioning the provocative actions of other claimants damages U.S. credibility. The Aug. 3 State Department statement on the South China Sea, which singled out Chinese actions as "risk[ing] further escalating tensions in the region," was an unfortunate example of this. By abandoning its traditional even-handed and objective approach, Washington provided Beijing with ammunition to argue that the United States has taken sides against China.

Singling out China may bring cheers from some quarters in the short term, but it undermines U.S. influence in the South China Sea in the long run. The Aug. 3 statement, for instance, was initially quietly welcomed by several of the Southeast Asian nations, as it came on the heels of the ASEAN Ministerial Meeting in Phnom Penh where the organization failed to agree on a joint communiqué for the first time in 45 years due to differences over whether to include a reference to the Scarborough Shoal incident. However, the subsequent increase in U.S.-China tensions heightened anxiety in Southeast Asian capitals, which then appealed to the United States to take a diplomatic pause. Washington’s misstep temporarily reduced rather than enhanced its effectiveness as a counterbalance to China.

Going forward, the United States should hew closely to its principled approach to managing the South China Sea territorial disputes and maintain its longstanding position of neutrality on those disputes. At the same time, it should emphasize the shared interests of the United States and other nations in international norms that are threatened by China’s assertive policies.

The United States should also press for a legally binding framework governing claims and disputes in the South China Sea. That means urging all claimants to bring their maritime claims in conformity with the Law of the Sea treaty — which the United States should also ratify, in order to increase the effectiveness of its efforts. Furthermore, theUnited States should continue to encourage China and ASEAN to initiate negotiations on a code of conduct containing a dispute settlement mechanism. Once the process of negotiations begins, it is likely to have a calming effect that will defuse tensions.

The smaller states of the region are anxious that the new type of major power relationship that is being discussed by Washington and Beijing will lead to increased U.S.-China cooperation at the expense of the interests of other countries, including the members of ASEAN. These concerns should be promptly dispelled, and the United States should continue to promote the centrality of ASEAN as an anchor of regional stability.

Finally, it is imperative that the United States continue to strengthen its economic, diplomatic, and military engagement in East Asia. The rebalancing of U.S. strategic priorities to Asia is essential to ensure that the peace and stability that has prevailed in the region for the past two decades — and from which all regional nations have derived benefit — endures.

Bonnie S. Glaser is senior advisor for Asia and director of the China Power Project at the Center for Strategic and International Studies (CSIS).